How much should I offer over asking price?
I have clients that have put 4-5 offers in and continue to be outbid. Now they are asking how much do I need to offer over asking price to win?
With the inventory shortage continuing and almost every house ending in a multiple offer situation, many buyers are becoming discouraged because they continue to be outbid by the competition.
So when they finally get fed up with losing homes they put offers on, they eventually ask me the question: "How much over asking do I need to offer in order to win this house?"
I wish there was a simple answer I could tell them like, "20% over asking or 30% over asking" but unfortunately it's a little more complicated then that. So I figured I would take a little time to share with you what I explain to my clients on how we come up with the offer that we are going to submit.
The first thing I explain to my clients is that in this red hot sellers market that only seems to be continuing to heat up, the list price is just where the bidding is starting.
My next question is how bad do you want this house, how upset would you be if someone moved into this house. If it's the first or second offer they normally say if it's meant to be it will be but if its the 6th or 7th offer they want to pull out all of the stops in order to get their offer accepted.
So the first thing I do is look at the house they want to put an offer in on and run extensive comps to see what I think it will appraise at. This is probably the most crucial step of the process because an accurate estimate of the appraisal value gives my clients the information they need to be able to calculate their offer.
It's at this point that I ask them if they are prepared to offer above what the house may appraise for. I do this with a lot of reservation and I explain the risks of offering over appraisal value but desperate times call for desperate measures. I understand why some choose to do it but I want to make sure that my clients fully understand what they are doing when they are offering over appraisal value. I also advise them that if you are willing to offer over appraisal value, you should be prepared to stay in this house long term, probably over ten years in order to gain equity.
Most recently I've been seeing some sellers asking for an appraisal gap. Which is a clause that commits the buyer to cover the difference between the appraisal and offer price if the house appraises for less than the offer.
So when designing the offer with my clients I explain to them the gap clause and if they are willing to commit to it and if so by how much? With a gap clause you can put limits on how much over the appraisal you are willing to cover.
Now remember this is additional cash you need to bring to the closing table so its important to calculate out how this would affect the cash needed to close and if you have those funds available to you.
Even if the sellers are not requiring the appraisal gap clause, it could be something that strengthens your offer and possible stand out amongst the rest. But I do need to reiterate to make sure you fully understand what you are getting yourself into before offering above appraisal value and committing to appraisal gap clauses.
So like I said before I wish I could give you a magic number to offer above asking to guarantee you to win but ultimately it depends on how much cash you have saved up and how much you are willing to go above appraisal price. I wish I could say it is going to get better but I think it is going to get worse before it gets better and I think it will be cool down not a drastic shift to the downside once it changes. Until there is a drastic increase in available inventory this red hot sellers market will be sticking around.
Which is obviously great for sellers but absolutely miserable for buyers. My heart goes out to all those buyers who are struggling with these bidding wars.
I wish you the best of luck, I know it's tough but if you keep at it, I know you will find the one!